S&P 500 Futures: No Selling Allowed?

Yesterday the major equity indexes continued to show their resilience. For two days, the ESM16 found buyers less comfortable above 2040-45; and with the Brussels terrorist attack, the futures were offered during Tuesday’s globex session. However, after the 8:30 CT cash open, it was nothing but buy programs in the morning session, pushing the index higher and erasing the overnight losses as the S&P futures once again found itself above the 2040 level late in the day. As the markets went into the 2:00 closing hour, the market-imbalance-meter (MIM) began to show market-on-close orders stacked heavily to the sell side to the tune of over $1 billion; and this eventually grew into a $2 billion MOC sell imbalance which, once again, showed the lack of fortitude with the futures up near 2040. The index sold off nearly 10 handles into the close; however, it traveled back to close above 2040. For three consecutive sessions, volume and momentum have tended to stall as the index approached 2050; but at the same time, sellers have been unable to control the tape, thus leaving the market in a buy-the-dip mode.

Overnight, the S&P futures continued their low volume, choppy range trading to a low of 2037.75 into the Asian close, before bouncing into the stronger Euro open, when they made a high of 2045.25. The index is currently trading near the middle of that range at 2041.50, down one point on the day. At 6:30 am CT, globex volume is the lowest of the year with just over 100K contracts traded. The calendar today only has a few items - most notable are the new home sales and EIA report coming during the 9:00 CT hour, and without any huge surprises, we anticipate another long and quiet day.

A few days ago we noted that some of the post-quad witch and post-FOMC statistics this week suggested lower prices, but we were hesitant to go short. With this price action it is very difficult to counter-trend trade; and those who keep shorting for more than a scalp are getting chopped up and stopped out. At the same time, the stats leading up to and following the Good Friday holiday tend to lean bullish. Our friend Ryan Detrick noted that March 23rd, since the year 2000, has been the third best performing day of the year with the SPX having average a higher close by better than 1%.

Q1 – 2016 Coming To An End

We are beginning to look at the end of the month next week, which is also the end of the quarter. Q1 was a tale of two halves. The first half saw a volatile 10%+ drop in equities and the second half saw those losses pared. The run-downs and run-ups have been historic. Since making a low in February, the six-week run higher has looked similar to last October, when, on the heels of correction, the S&P had a historic month which seemed to drive away bears. However, six weeks of gains came at the end of the month while the futures were at a pivotal resistance area of 2100. The current buying will make six weekly gains this week, near the end of a quarter, with pivotal resistance at 2050 and not far from 2100. Some rebalancing going into the end of the quarter or beginning in Q2 would seem to be likely, especially as the markets head into a seasonally less optimistic time. The chart above shows the short-term Volatility Index (VXST) over the last 12 months. Notice that last year prior to the correction, the $10 was major support for volatility; and post-correction, the $12.50 area has been vital and is currently struggling with that area. We urge caution with portfolios as the markets head into Q2.

In Asia, 7 out of 11 markets closed lower (Shanghai Comp +0.35%), and In Europe 8 out of 12 markets are trading higher this morning (DAX +1.11%). Today’s economic calendar includes MBA Mortgage Applications, New Home Sales, EIA Petroleum Status Report and 2-Yr FRN Note Auction.

Our View: This environment is better for option strategies than for trading. We don’t expect to find anything today different than what we have seen the last few days. Low volume, tight range and a thin-to-win trade. It wouldn’t surprise us if 2050 gets taken out before the week is over; but for now, the trend leans toward selling the 2045 area while using 2050 as a risk marker, or toward buying dips while using the globex lows as a risk marker. Our call is to buy the lower end of the range, and to sell the upper end of that range.

As always, please use protective buy and sell stops when trading futures and options.

• In Asia 7 out of 11 markets closed lower: Shanghai Comp +0.35%, Hang Seng -0.25%, Nikkei -0.28%
• In Europe 8 out of 12 markets are trading higher: CAC +0.47%, DAX +0.96%, FTSE +0.14% at 5:30am CT
• Fair Value: S&P -9.66, NASDAQ -11.20, Dow -105.51
• Total Volume: 1.5mil ESM and 5.3k SPM traded